Wall Street Is Ignoring CoreWeave's Biggest Red Flag

Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Wednesday, November 11th. In today's episode, we'll break down why investors are willing to pay more for Walmart than for AI giants like Meta. We'll also break down CoreWeave's earnings and why they're lifting the whole AI trade despite some red flags. Plus, we got an update on the NVIDIA investigation. Then stick around to the end of the show to find out what people are buying During China's massive singles day shopping event. We got a great show for you today. Let's go. The stock market took a step back yesterday as investors got a reminder that inflation is still a problem. The S&P 500 fell about 0.4% yesterday and the NASDAQ dropped by 0.7%, both giving back some of the Monday gains. The main driver for the sell-off yesterday was October's CPI report coming in hot across the board. This likely means that more rate hikes are on the way from the Fed. The bond market really didn't like that report. The two-year treasury yield, which is basically the market's best guess at where the Fed is headed, Jumped about 18 basis points to around 4.73%. That was actually the biggest one-day jump for the two-year since April of last year. And the 10-year treasury yield, which drives stuff like mortgage rates, also moved higher, closing right around 5%. If you want a more detailed breakdown of the October CPI report, go check out yesterday's episode. Now, Nvidia was also a big drag on the market. Shares fell another 5.5%. Its investors continue to digest the investigation. into CEO Jensen Huang. There's some more stuff that came out regarding the situation that makes it look worse for Jensen. We'll break that down in just a bit. But, you know, it wasn't all bad news yesterday. The financial sector, health care sector and consumer staples managed to finish higher. And that's been the trend that we've been seeing in the second half of the year. Investors have been moving money out of tech stocks and into more defensive sectors like health care, utilities and consumer staples, pretty much the companies that will keep selling things. Even if the economy slows down, the perfect example of this is a company like Walmart right now. Walmart stock trades at about 40 times forward earnings. You compare that to Meta, which trades at 19 times forward earnings or Nvidia, which trades at 14 times forward earnings. So right now investors are paying more for a retailer like Walmart than Then leading edge AI companies, you know, that's not what you usually see. And I wonder how long it's going to last. Now, tech stocks are getting a boost this morning. I'm recording this right at the open and the Nasdaq and S&P are both flashing green. So we could be in for a big day today. We'll keep tracking on what's going on with the AI trade and breaking it down here on the podcast. So definitely get subscribed if you haven't already and tune in every day to stay in the loop. Also, we just upgraded our set here. So check out the video version of the podcast on Spotify or YouTube if you haven't already. Let me know what you guys think of the new setup. Let's run through some headlines, starting with CoreWeave. CoreWeave reported earnings last night, and there was a lot riding on that report. You know, CoreWeave has been one of the hardest hit AI stocks. Shares are down 40% in the past month and 60% from their peak back in May. Well, the market liked what CoreWeave reported because CoreWeave stock is rallying this morning and it's pushing up the entire trade up with it. CoreWeave's revenues jumped nearly 170% from a year ago to $3.66 billion. That beat Wall Street estimates. And their revenue backlog, which is their contracted future sales, jumped to $132.5 billion. That's up from the $104 billion just three months ago. And management also raised their full-year revenue forecast. Now, CoreWeave's business model is to build data centers and pack them with NVIDIA chips. Then sell that computing power to customers like Meta, Microsoft, and OpenAI. And clearly, demand continues to be strong. But the concern around CoreWeave over the last few weeks has been their spending and the debt they're taking on to build all that computing capacity. According to their earnings, CoreWeave has about $47 billion in debt. And last quarter, the company paid $846 million in interest alone on all their debt, which is more than double their adjusted operating income of $379 million. And overall for the quarter, the company reported a net loss of $700 million. Now, one of the things that we talked about recently is that CoreWeave's bonds were recently yielding around 15%, which is near junk status. So it's becoming harder and more expensive for the company to borrow more money. So CoreWeave's new plan is just to ask their customers to prepay for compute, and their customers are planning to do it. CoreWeave expects to collect around $9 billion in customer prepayments and deposits. Over the next three months, the company is leaning harder on their customers, and they also plan to use their customer contracts to get loans at around 7%. So I guess that was enough to satisfy the market. I mean, CoreWeave stock is up around 15% this morning at the time of this recording. Personally, I'm still not fully convinced. I still think the debt concerns are valid. According to an article from the Wall Street Journal this morning, data center landlords have gotten so nervous about CoreWeave's credit that none of the data center landlords will sign CoreWeave as a tenant. Unless a tech giant cosigns and guarantees the rent. So to me, that's a massive red flag. There's also concerns on what could happen with CoreWeave if there's a data center slowdown from the midterm results. Now, the CEO actually addressed that on the earnings call. They said that almost all of their power is already online or under construction, so they shouldn't be impacted in the short term. Plus, the CEO said that if data center buildout does slow down, well, their existing data centers become even more valuable. That's basically what we've been saying on this show for the last week as well. So I don't know. I mean, the market seems to be happy with the results. I'm still kind of cautious about the whole thing, but let me know in the comments on what you guys think. Let's talk about some stocks making moves today. Nvidia is bouncing back this morning after a rough start to the week. On Monday, we told you guys about Nvidia's board launching an investigation into CEO Jensen Huang over his affair with an executive from a company called MegaSpeed. Who might have also been a Chinese spy. Since then, the story has only gotten messier. There's been reports that last year, while the U.S. Commerce Department was investigating MegaSpeed for possibly smuggling NVIDIA chips into China, NVIDIA's top lawyer contacted a senior Commerce Department official about that investigation. And then later, the Justice Department also asked the Commerce Department to pause its work. On the MegaSpeed case. Now, we don't know if Jensen pulled some strings in the background to put a pause on the investigation to protect his mistress, but it does raise more questions about the company's relationship with MegaSpeed. Nvidia's board has hired the law firm Wachtell Lipton to conduct its own investigation and whether any company secrets were compromised because of Jensen's relationship. And then on Monday, President Trump also said that the FBI was looking into the situation. You know, as a result, Nvidia stock fell 4% on Monday and then 5% on Tuesday. But today, investors are buying the dip. Shares are up around 4% this morning at the time of this recording. Moving on, let's talk about HIMS. They've also had a brutal couple of days. HIMS stock fell 12% on Monday and then 17% on Tuesday after the telehealth company reported disappointing earnings. Revenues in the third quarter grew 49% to $890 million. That was just shy of expectations. The company posted a net loss of... $33 million. I think investors might be freaking out about HIMS's subscriber numbers. HIMS ended Q3 with about 2.79 million subscribers. That's actually down from the 2.89 million at the end of Q2. And analysts were expecting subs to be more than 3 million. Now there is a potential bright spot here. HIMS recently announced the deal to offer Eli Lilly's weight loss drugs through their platform. So that could boost Q4 numbers. But for now, investors are worried about the subscriber slowdown. The stock lost over 25% this week. And if you zoom out, shares are down over 40% on the year. It's funny, the company that hangs its hat on fixing performance issues is having some performance problems of its own. Shout out to a producer, Mike, for coming up with that one. Let's wrap the show with a fun fact. Today is November 11th, which means that in China, it's Singles Day, the biggest shopping event on the planet. Singles Day started off as a celebration of being single back in 1999 by a group of college kids. But then in 2009, Alibaba turned it into a massive day of sales, kind of like Black Friday and Cyber Monday, but on steroids. Last year, Singles Day sales hit roughly $250 billion. For some comparison, Americans spent about $44 billion online during the five days from Thanksgiving. Through Cyber Monday. So Singles Day is five times bigger than what we're doing here in the U.S. And, you know, this year, one of the hottest things people are buying in China for Singles Day is A.I. Alibaba's Tmall says that sales of A.I. tokens, which are basically credits you buy to use A.I. models, jump more than 700 percent compared to the month before. Also, sales of A.I. companion robots and A.I. toys are up almost five times. Compared to last year. Here's a bonus fun fact. China's most famous live stream seller. Is a guy named the Lipstick King. Because he usually sells makeup. Well he started selling AI products this year. And he sold 100,000 monthly subscriptions. To an Alibaba AI tool. In like 30 minutes. So I wonder if we're going to get any AI deals. On Black Friday here in the US. I do find it kind of funny. That one of the most sold items on Singles Day. Is a AI companion robot. Cut. Well, all right, guys, that's the rundown for today. Hope you guys enjoyed today's episode. If you did and you have like five extra seconds, consider giving us a five-star rating on Apple, Spotify, YouTube, wherever you listen to your podcast. You know, all that engagement really does help us out and it helps other people find the show. Thank you guys so much for listening, watching, and commenting. Shout out to Mike and V for all the work behind the scenes. And we'll see you guys here in the next one.